The escalating debt crisis in Laos is pushing the country toward a meltdown and even experts believed that Vientiane is on the brink of loan default.
Laos’ low foreign exchange reserves make experts worried that the southeast Asian nation might be embarrassingly close to a loan default, Financial Post reported. Anushka Shah, vice president, and senior credit officer at Moody’s Investors Service said, “It (Laos) is on the brink of default,”.
Laos owes about half of its foreign debt to China, which opened the gate for infrastructural projects. China lent the money for the projects such as hydropower plants, publicly guaranteed debt and railway lines. Mostly, the loans for infrastructural projects came from the China Development Bank (CDB) and the Export-Import (Exim) Bank of China.
Even before the onslaught of covid-19, the World Bank and IMF through the Low-Income Country Debt Sustainability Framework had identified Laos as potentially suffering from a high risk of debt distress. The accumulation of sovereign debt in itself is not necessarily a problem, but Laos’ position as a small, emerging economy placed the country at heightened risk of distress. Funding for resource projects had produced a mismatch between the longer-term mobilization of state revenue and the short-term maturity of debt obligations.
The covid situation also played an important role in affecting the Laos economy. Due to the covid situation, the country saw a massive decline in tourism revenue, a breakdown of supply chains, and a loss of up to USD 100 million in remittances from workers forced to return from Thailand, which added to the financial cost of the pandemic.
In discussions over Laos’ debt distress, attention often focuses on the Laos-China Railway project, financed through China’s Exim Bank under the umbrella of the Belt and Roads Initiative.